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Do Index Funds Monitor?

Author

Listed:
  • Davidson Heath

    (University of Utah David Eccles School of Business)

  • Daniele Macciocchi

    (University of Utah - David Eccles School of Business)

  • Roni Michaely

    (University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute)

  • Matthew Ringgenberg

    (University of Utah - Department of Finance)

Abstract

We examine whether the rise of index investing leads to increased agency conflicts. Using a new research design that generates exogenous variation in fund holdings, we find that index funds are weak monitors. Unlike active funds, index funds rarely vote against firm management on corporate governance issues. Moreover, although index funds do exit 16% of their holdings each year, they do not use exit to enforce good governance. They also rarely file a Schedule 13D, indicating they do not intend to affect firm policies. Our results show the rise of index investing is shifting control from investors to corporate managers.

Suggested Citation

  • Davidson Heath & Daniele Macciocchi & Roni Michaely & Matthew Ringgenberg, 2019. "Do Index Funds Monitor?," Swiss Finance Institute Research Paper Series 19-08, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1908
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    Keywords

    governance; index investing; monitoring; passive investing; voting; exit;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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